Fitch Ratings, based in Seoul, has reported that the macroeconomic landscape for covered bond markets in the Asia-Pacific region—specifically in Australia, New Zealand, Singapore, and South Korea—has become increasingly challenging. The prevailing issue across these regions is persistent inflation, which has prompted some markets to initiate monetary tightening, while others are contemplating further interest rate hikes.
As a result of rising financing and living costs, borrowers may encounter heightened pressure in managing their debt obligations, particularly in regions with a significant number of floating-rate mortgages. Nonetheless, current interest rates are not at historic highs, with most jurisdictions maintaining rates below their peaks expected in 2025, with the exception of Australia. Furthermore, the unemployment rate remains stable across these nations, and Fitch identifies labor market health as a crucial factor influencing the performance of mortgage assets.
Despite these challenging conditions, the ratings for covered bonds in the APAC region have remained stable. The programs continue to benefit from ample rating buffers, robust overcollateralization, and structural safeguards that enhance their resilience during moderate economic stress. Noteworthy recent upgrades of the Commonwealth Bank of Australia (rated AA/Stable) and ASB Bank Limited in New Zealand (rated AA-/Stable) have further fortified the Issuer Default Rating buffers in relation to their covered bond ratings.
The primary concern for the sector centers on whether persistent inflation and tighter financial conditions could jeopardize employment and significantly impact the quality of cover pools and overcollateralization. Currently, Fitch assesses these risks as manageable and consistent with existing rating levels.
